Federal Reserve Announces First Interest Rate Target Hike Since 2006

Embedded in the move is even larger interest on reserves payout to banks.


CNBC's report on seemingly big news from the Federal Reserve today:

After seven years of the most accommodative monetary policy in U.S. history, the Fed on Wednesday, as widely expected, approved a quarter-point increase in its target funds rate. The new target will go from 0 percent to 0.25 percent to 0.25 percent to 0.5 percent. Most members expect the new rate to coalesce around 0.375 percent before the next hike, according to a chart showing individual member expectations.

The decision, given the official stamp of approval from the Federal Open Market Committee, marks the first increase since the panel pushed the key rate to 5.25 percent on June 29, 2006….

And how will they try to make sure the price hits this target?

The program will be ambitious, involving $2 trillion of securities that will be used in overnight trading to push the rate into the desired range. However, the FOMC statement said it will be some time before the Fed starts unwinding its mammoth $4.5 trillion balance sheet…. FOMC officials made it excessively clear in post-meeting documents that the pace of increases will be gradual and dependent on the quality of economic data…

In addition to raising the funds rate, the committee pushed the interest paid on excess reserves to 0.5 percent and put the rate on overnight reverse repo operations to 0.25 percent, both in conjunction with the sale of securities that will be needed to push the rate higher.

Some other commentary and news surrounding the Fed's action:

• Lu Wang at Bloomberg says we can expect to see a stock market that has been goosed for years by zero-rate politics start to gain volatility and lose value

• …However today on the news as I write, stock price measures rallied from 1 to 2 percent.

Reformed Broker wants us to keep our eye on things that might start to unravel as we move into a world where interest rates are higher, such as areas that have been issuing lots of new debt in the recent past.

• Gerald O'Driscoll, anticipating this move yesterday, notes the elite-giveaway aspect of the move

the Fed is already paying commercial banks over $6 billion in interest payments annually. That amounts to a fiscal transfer from taxpayers to bankers. Raising rates will only increase that transfer. As we approach a presidential election year, that is likely to become grist for political mills….

Free-market economists are in a policy conundrum. Most have long advocated higher interest rates.  ut the facilities through which that policy will now be effected have questionable validity…

All of the above is a consequence of the Fed's having implemented extraordinary monetary policy. That included shedding all liquid, short-term Treasury obligations in favor of loading up on risky and illiquid, long-term debt obligations. Critics argued the Fed would rue the day it did that. Now that day has arrived.

• And Barry Ritholtz at Bloomberg says these sort of day-by-day news bulletins from the Fed don't matter very much at all.

My blogging from September when the Fed declined to raise rates but warned they might later in the year, as they now have.

Jeffrey Hummel wrote a detailed feature for Reason last year on how the Federal Reserve's tactical choices since the 2008 downturn have changed the monetary policy game in a bad way.